Even by his own high standards, Nicolas Sarkozy excelled himself. The French president bounded out of the emergency summit of European leaders and on to a specially made-for-TV stage.

The tensions were palpable, the theatrics mesmerising. It was well past midnight and the leaders, charged with saving the euro, were getting nowhere fast after a fine Friday supper. Greece might be saved. But Portugal? Ireland? Spain? Even Italy?

Assorted weary diplomats and eurocrats in the corridors of the unlovely Justus Lipsius building in Brussels were predicting an all-nighter when the text messages started pinging and the closed-circuit TV screens flashed the message: "Sarkozy press conference".

The summit was over. It was 12.30am. Sarkozy and his entourage swept into the French delegation's media room, which had been given a makeover – fancy lighting, a big blue backdrop with a special summit logo behind the president, the 16 flags of the eurozone countries.

Sarkozy claimed the political leadership of the 16 members, announced a defining victory against the markets and the "speculators" wrecking the currency. The metaphors were all martial. Europe was at war. He would not give away his "lines of defence". But by the time the markets opened on Monday morning, the enemy would have learned its lessons and beat a retreat.

In the previous hour upstairs at the summit, Sarkozy had thrown a wobbly. "It was really a drama," said an experienced European diplomat. "A very abrupt end to a summit – because Sarkozy said he had had enough and really forced Merkel to face her responsibility."

A European Commission official added: "He was shouting and bawling. The Germans were being very difficult, and not only the Germans. It was a big fight between Sarkozy and Merkel."

A French finance ministry official said: "Our beloved and fearless leader loves this kind of situation. It may have been that he was a little forceful, and I think that he would have been right to be, because it was a serious situation in there."

Deadly serious. Merkel said this week that the crisis triggered initially by Greece's debt problems had called the EU's future into question – that the EU was facing its biggest challenge since 1990, the collapse of communism and the unification of Germany.

According to senior Spanish government officials quoted by Spain's El Pais, Sarkozy called Merkel's bluff on what, 48 hours later, turned into a massive financial package that has rewritten the way the single currency functions and changed the European Union in fundamental ways that may take years to play out.

"If at a time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense," Sarkozy told the eurozone leaders, according to El Paistoday. It quoted the Spanish prime minister, José Luis Rodríguez Zapatero, as telling his colleagues this week that Sarkozy threatened to quit Europe's monetary union.

"Sarkozy went as far as banging his fist on the table and threatening to leave the euro," one unnamed Zapatero colleague told the paper. "That obliged Angel Merkel to bend and reach an agreement."

The French had Spain, Italy, Portugal and the European Commission lined up behind them. On the other side stood Germany, ranged alongside the Dutch, the Austrians and the Finns, all quietly hoping Merkel would prevail.

The leaders' after-dinner debate signalled that Europe was in the throes of an existential crisis, according to diplomats and officials familiar with the proceedings. "This discussion touched on the very sinews of the state," said one diplomat.

"It was a fundamental discussion about sovereignty, about the role of the member state, about what the EU is for, the role and power of the European Commission," said a second diplomat.

Sarkozy claimed the outcome as a famous victory. In fact, he had bought himself some time, with the leaders agreeing to convene an emergency session of the EU's 27 finance ministers the next day to agree the fine print.

By 2.15am on Monday, the deal was done: a €750bn (£639bn) safety net for the single currency, made up of three elements – a fast-track fund run by the European Commission, a much larger system of loans and loan guarantees from the 16 eurozone governments, with the International Monetary Fund putting up one euro for every two from the Europeans.

Europe was opting for shock and awe. Repeatedly in the past two weeks, Merkel has declared that "politics has to reassert primacy over the financial markets". This was the attempt.

But a decisive factor in swaying the argument may have come not from Berlin, Paris, or Brussels, but from Washington. Since their first summit on the Greek crisis on 11 February, the Europeans had been prevaricating, agonising, and quarrelling. Prompt action in an emergency is not the strongest suit of a union of 27 governments. Washington was frustrated.

"The Americans were complaining that there was no credibility in the way the Europeans take decisions," said one diplomat.

By last week, Washington had had enough as the crisis threatened to spiral out of control. In Brussels and Madrid, Joe Biden, the US vice-president, privately told European leaders to get their act together. A few hours before the Sarkozy show on 7 May, Timothy Geithner, the US treasury secretary, pressed European finance ministers for a big decision and promised help from the US Federal Reserve or central bank.

Then last Sunday, President Barack Obama went on the phone to Sarkozy and Merkel. "The €750bn fund was the idea of the Americans, who insisted on the need to mobilise massive money to impress the markets and to stop bleeding confidence. That was their concrete message," said a diplomat.

Tellingly, the White House confirmed that Merkel, not Sarkozy, was the main obstacle to a decision staggering in its scale and ambition. Obama and Sarkozy "agreed" on the need for urgent action, while Obama and Merkel "discussed" the need for urgent action.

By early on Monday, the finance ministers were rushing to meet Sarkozy's promise that the huge rescue package would be ready by the times the markets opened in the far east. They missed the deadline for Australia and New Zealand.

Outline agreement had been reached on the European fund of €500bn. But who would control it? The Germans insisted it had to be national governments, not the European Commission. They won that argument and Christine Lagarde, the French finance minister, pushed for a rapid conclusion before the Tokyo traders switched on their computer screens. As argument continued over how to label the rescue, the Dutch conjured a new concept that kept everyone happy – a "special purposes vehicle". The deal was done. France had won. Germany had lost.

"This was supposed to be a German euro. It's turned into a French euro," complained a German expert.

By Wednesday, with the implications of Europe's giant leap in the dark beginning to dawn, José Manuel Barroso, president of the European Commission, went further. Seeking to build on last weekend's breakthrough, he proposed even stronger measures to shore up the euro. The safety net agreed, despite German hostility, is temporary – for three years. Barroso said it should be permanent.

He wanted member states' budgets to be "peer reviewed" by his boffins and European finance ministries before they went before national parliaments. A direct assault on national sovereignty and parliamentary democracy, complained many.

Barroso's argument was for full-fledged harmonisation of tax and spending policies among the countries sharing the currency, otherwise the euro had no future.

"Let's be clear. You can't have a monetary union without having an economic union," he said. "Member states should have the courage to say whether they want an economic union or not. And if they don't, it's better to forget monetary union altogether."

And in Aachen the next day, Merkel started talking about "the pound, the deutschmark, the franc, and the drachma". It sounded almost nostalgic for the old, simpler days of Germans' love affair with their national currency, though her speech was to advertise her credentials as a fervent European.

Last Monday, following the most momentous weekend in Brussels for years, the euro rallied on the markets.

By yesterday, however, it was back at its lowest point against the dollar in 18 months and leading German bankers were warning German taxpayers they would probably not get back the billions they were "lending" Greece.

Sarkozy's famous victory is less than final – and he might yet regret his showdown with a chancellor of Germany.

Additional reporting by Giles Tremlett in Madrid and Lizzy Davies in Paris

Could France really quit?

Not without bringing the whole project crashing down. Technically it can quit and reinvent the franc, below, in the same way Greece could leave and start paying for things with drachmas. But the 16-member eurozone would struggle to survive if one of its two main economies pulled out. Germany alone would have to underpin the finances of Italy, Ireland, Spain, Portugal and Austria, which have all borrowed heavily from lenders who are nervous they might not get their money back.

How would it cope?

France It would find life difficult: it has low growth and high levels of debt. Sarkozy has kept his head down over the past year with only the occasional speech delivering the message that France is pootling along fine. However, below the surface, its banks are struggling: Credit Agricole, one of Europe's largest, is high on the list of troubled institutions, having bought all kinds of loans related to the sub-prime crash and a lot of Greek bonds.

Then there are measures like labour productivity growth, which is lower than the UK's over the 12 years from 1997 to 2009. It is lLow productivity and growth that is the crux of the issue and France is in much the same position as other European nations, including Britain. Investors ask how it will grow its way out of the crisis when demand in Europe is flat and its goods cost too much to sell in other parts of the world.

Would the economy be affected by life outside the euro

What would happen to its economy?

Like Britain, France would probably find its currency devalued against the euro. That helps cut the debt burden, because it would be valued in the new currency, which is suddenly worth less. But import costs would go up; and, much more importantly, without German protection, financial markets would get nervous and the cost of interest payments on its debt would rise.

What about the Germans?

Angela Merkel has denied the French threatened to quit. Her advisers believe the story of Sarkozy's table-thumping, sourced to figures in the Spanish government, is more likely to come from the mouths of rumour-mongering hedge funds that have placed bets on the collapse of the euro. Yet it could be that her nose is out of joint because she wants to be the first to quit. Certainly there is a strong sense inside Germany that it should stop bailing out profligate southern European nations. Rumours abound – probably put about by hedge funds – that Merkel is printing deutschmarks in preparation for a split.

Would that help them?

German banks hold billions of euros of Greek debt. Around half the mortgage loans raised by Spanish construction companies to build flats on the Costas were funded by German banks. Spaniards and Greeks buy Audis and VWs by the truckload. In short, the German economy is inextricably linked to Europe. The savings of ordinary Germans are invested in things that are now worth much less than they were: much of their cash was behind property speculation in Greece, Ireland and Spain. Without German loans, a property boom would not have happened. Most economists argue the euro countries need to stand together or they will fall apart – and fall a long way.